LECTURE 1 notes Essay

LECTURE 1 (CHAPTERS 1 AND 2)
Economy comes from a Greek word “one who manages”: both face many decisions
Society’s resources are scarce ( we have limited resources and cannot produce ALL the goods/services people wish to have)
“Economics is the social science connected with EFFICIENT use of SCARCE resources to achieve MAXIMUM satisfaction of economic wants”
10 KEY ECONOMIC PRINCIPLES
1. People face tradeoffs (to get one thing, we have to give up another)
We give up efficiency to get equity sometimes
i. Efficiency society gets the MOST that it can from scarce resources ii. Equity benefits of scarce resources are fairly distributed among society members
2. Opportunity Cost ( cost of something is what you give up to get it)
Comparing costs and benefits of alternatives (college or work?)
3. Rational people think at the margin: choosing a little more or a little less
Marginal changes small adjustments to an existing plan of action
We make decisions by comparing costs and benefits at the margin
4. People respond to incentives (things that motivate people to do something)
Marginal Benefit vs. Marginal Cost influences people to make changes in decisions

5. Trade can make everyone better off through specialization
Trade increases competition (good thing!)
6. Markets are an effective way to organize economic activity
Market economy allocates (sets apart) resources through decentralized decisions of firms and households as they interact in markets
Households decide who to work for and what to buy and firms decide who to hire and what to produce
Adam Smith said households and firms interact in markets as if they are guided by an “invisible hand” (invisible hand=prices)
7. Governments can sometimes improve economic outcomes and promote efficiently and equity during market failures
Market failures happens
i. When the market fails to allocate (distribute) resources efficiently ii. Because of an externality (impact of one person/firm’s actions on the well-being of a bystander) iii. Because of market power (ability of a person/firm to influence market prices greatly (higher prices lower consumer welfare (lower individual benefits from the goods)

8. Standardization of living depends on a country’s production
9. Prices rise when the government prints too much money (inflation prices rise and value goes down)
10. Society faces a short-run trade-off between inflation and unemployment (when unemployment rises, employees demand higher wages. Companies try to raise wages by raises prices and inflation builds up)
1-4 fall under How people make decisions
5-7 fall under How people interact with each other
8-10 fall under The forces and trends that affect how the economy works
Thinking like an economist
Think analytically and objectively (practical and logical free of emotional factors
Make use of the scientific method ( systematic search of knowledge through formulating a problem, collecting data, and formulating and testing a hypothesis)
Observe real world facts/data
Formulate explanations of cause and effect (hypothesis)
Test these explanations
Accept, reject or modify the hypothesis
And based on the results, the hypotheses becomes a theory, law or principle (aka a model)
Theoretical economics establishing economic theories by gathering, arranging and generalizing from facts (process of applying economic theories and principles)
Generalizations economic theories/principles/laws relating to the economy
Economic principles tendencies of avg consumer/worket/firm
Consumer spending rises when income increases (even though some people save when their income increases, on average people spend when this happens)
Assumptions
Assumptions make the world easier to understand
Scientific thinking decided which assumptions to make
Different assumptions are used to answer different questions
Ceteris Paribus (Other Things Equal): assumption that all other variables except the ones under consideration during an analysis, are held constant…

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